Like virtually everything else in this world Dividend Stocks can be placed into a few categories based on their historic performance and expectations for the future. Here are three broad categories and some representative selections from each:
As you might guess, these dividend stocks that are doing exactly what they should do - consistently raising their dividends each year in spite of troubled economic times. Some of these companies are in sectors that are less affected by the economic downturn, but they have one thing in common, they are well managed by executives that understand the importance of growing the companies' dividends. Here are some examples of these companies:
- Johnson & Johnson (JNJ): In May 2008, it increased its quarterly dividend 10.8% to $0.46/share.
- Kimberly-Clark Corporation (KMB): In March 2008, it increased its quarterly dividend 9.4% to $0.58/share.
- McDonald's Corp. (MCD): In November 2008, it increased its quarterly dividend 35.1% to $0.50/share.
- Pepsico, Inc. (PEP): In June 2008, it increased its quarterly dividend 13.3% to $0.425/share.
- Procter & Gamble Co. (PG): In April 2008, it increased its quarterly dividend 14.3% to $0.40/share.
- Wal-Mart Stores Inc. (WMT): In April 2008, it increased its quarterly dividend 8.2% to $0.238/share.
These are companies that held their dividends flat. Dividend investors are keying on companies that can consistently raise their dividends year after year. Sometimes a company can't do this, and instead of cutting the dividend, they hold it flat and try to weather the economic storm. This may not always be a bad thing, because it shows that management understands the importance of maintaining its dividend. Many dividend investors, myself included, may overlook a single flat year. Here are several companies that missed their last dividend increase:
- General Electric Co. (GE) last raised its dividend December 2007.
- The Home Depot, Inc (HD) last raised its dividend November 2006.
- Pfizer Inc. (PFE) last raised its dividend November 2007.
- US Bancorp (USB) last raised its dividend December 2007.
Each of the above stocks has been classified as On The Shelf. That means they will be set aside within my income portfolio with no additional purchases made until its outlook improves or deteriorates to the point it should be sold. As I was writing this article, PFE announced Monday that it was going to slash its second quarter dividend 50%. I immediately sold the stock after its dividend cut.
These are companies that cut their dividends. Fourth quarter 2008 was the worst period for dividend cuts since 1956 when Standard & Poor's started keeping records. Unfortunately, the carnage may not be over. UBS Securities strategist Thomas Doerflinger estimates that S&P 500 dividends per share will drop an additional 8% in 2009. That would be the largest decline since the Great Depression and only the eighth time since 1942 that dividends fell in consecutive years. Here are several companies that contributed to the 2008 decline:
- Bank of America Corporation (BAC) first dropped its dividend in December 2008.
- Fifth Third Bancorp (FITB) first dropped its dividend in June 2008.
- KeyCorp (KEY) first dropped its dividend in August 2008.
- Regions Financial Corp. (RF) first dropped its dividend in September 2008.
Long-term, the best companies to add to our dividend portfolios are those that will continue raising their dividends even during economic downturns. These stocks tend to have conservative payouts less than 50%, which allows them to maintain their dividends during the tough times. They also have growing sales and earnings - you can't continue to pay higher dividends unless you have the earnings to back it up.
Full Disclosure: Long JNJ, KMB, MCD, PEP, PG, WMT, GE, HD and USB.